Corruption is an issue that has been discussed widely during the last two to three decades. While there was denial from accused parties, the International Monetary Fund’s (IMF) Governance Diagnostic Report has provided clear evidence of widespread corruption in Sri Lanka. It acknowledges that “governance and corruption issues have imperilled national and social well-being”.
The political change in 2015 was heavily influenced by anti-corruption sentiments and promises of good governance. After the miserable failure of that Government to take action against corruption, the public overwhelmingly voted for the same leaders who had been accused of massive appropriation of wealth through corrupt means.
A corruption-free, just society was one of the prominent demands of the peoples’ protests – ‘Aragalaya’ – in 2022, a façade that only changed the outer appearance of the Government. The infamous Adani deal on wind power is a case in point – amongst many such allegations against the current Government – that shows that corruption continues despite all efforts to curb it.
The nation is facing a Presidential Election and understanding why Sri Lanka cannot progress in development without minimising corruption is vital at this critical moment of Sri Lanka’s post-independence history.
What is corruption?
Amongst many definitions, one simple way to define corruption is ‘the abuse of entrusted power for private gains by political leaders or public officials’. It is a form of dishonesty or criminal activity undertaken by a person or organisation to acquire illicit benefits.
Forms of corruption vary but include bribery, extortion, cronyism, nepotism, parochialism, patronage, influence peddling, graft, and embezzlement. Corruption occurs in both the public and private sectors. Media personnel and civil society actors can also be involved in corruption. Actors can be individuals, companies, or organisations such as a political party.
Sometimes the ‘advantage’ gained through corruption may not be ‘undue’ or clear-cut but is nonetheless an advantage. For example, in some highly corrupt societies, people can only secure access to public health or education if they pay bribes.
In this example, the bribe-giver’s ‘benefit’ is merely their rightful due but without the bribe the public can’t exercise that right. The bribe-takers receive an advantage in carrying out functions that are their duty anyway.
While this extreme situation is not prevalent, school admission is a clear example in the Sri Lankan context where those who can afford to pay bribes have an advantage over others in obtaining admissions to the best schools in the country. Here the bribe-taker’s actions prevent rightful students, who live within proximity of the school, from getting admitted to the nearest school.
There are many different types of corruption. One useful way to classify corruption is to consider ‘grand,’ ‘petty,’ or ‘administrative’ corruption.
Grand corruption typically takes place at the public sphere’s top tiers and within the highest levels in private businesses. The Central Bank bond scam and the previously mentioned Adani deal are examples of grand corruption.
Grand corruption involves acts by elite persons in society who either make laws or are responsible for implementing rules, policies, and executive decisions. It involves large sums of money. Grand corruption is also often called political corruption, highlighting the direct or indirect involvement of political leaders in such corruption. It can also involve acts of large private corporations. One good example is Volkswagen’s violation of emission reductions rules.
Petty or administrative corruption is small-scale, everyday corruption at the interface between public institutes and citizens. Petty corruption involves bribery linked to the implementation of existing laws, rules, and regulations. For example, public servants may deliver services only if they receive a private payment in addition to the institutionalised official price for this service.
There are many examples of petty corruption In Sri Lanka. Bribery to get house construction plans approved, obtain timber transport permits, get school admissions, get route permits for private buses, get drivers’ licences, and avoid delays in pension payment initiation are only few examples of widespread petty corruption.
Usually, modest sums of money change hands in each case. However, when petty corruption is widespread, it can create many inefficiencies, public nuisance, and even discourage foreign investments in a country. Even if the payments are modest in petty corruption, the poor can be disproportionately affected.
Impact of corruption on the economy
Apart from ethical and moral considerations, why should one be worried about corruption?
Generally, corruption undermines economic development and threatens state security. It also undermines democratic values. UN member states have acknowledged the threat of corruption to the development process and have included Goal 16 in the 2030 Agenda for Sustainable Development calling on states to “substantially reduce corruption in all their forms”.
“Corruption undermines development and, in turn, effective anti-corruption efforts accelerate countries’ progress towards the achievement of the Sustainable Development Goals (SDGs). Preventing illicit outflows and ensuring the timely return of stolen assets can make a significant contribution to unlocking resources for financing development efforts.”
While the above quotation signifies the importance of reducing corruption, one may still argue that if corrupt gains are being circulated within the economy, it may not affect economic growth in a country and will only have distributional implications.
Most often, corrupt gains may be circulating within the economy in petty corruption but in grand corruption, ill-gained money often flows out of the economy. There are proven cases such as that of Ferdinand Marcos in the Philippines and many claims about Sri Lankan politicians syphoning ill-gained money to Dubai, Seychelles, and Uganda.
In fact, the IMF Governance Diagnostic Report states: “Current governance arrangements have not established clear standards for permissible official behaviour, acted to deter and sanction transgressions, nor pursued individuals and stolen public funds that have exited the country.”
This clearly shows that there is credible evidence that some of the wealth embezzled through grand corruption has been taken out of the country. Such leakages are detrimental to the economy because otherwise these resources would have been invested in the economy or spent on health, education, or public infrastructure development.
Public spending on wrong projects
Priority in allocation of Government or borrowed funds should be given to high-impact development and quick-return projects. Politicians distort the order of public spending, disregarding economic principles applied to prioritise projects, and allocate budgets for activities that lead to larger bribes or commissions. The love of corrupt politicians for certain large infrastructure developments, such as roads, power plants, harbours, etc. are on account of opportunities for larger commissions or personal political gains.
The Lotus Tower, Magam Ruhunupura International Convention Centre, Mattala Rajapaksa International Airport, Hambantota International Port, Mahinda Rajapaksa International Cricket Stadium, and the myriad highways in the country are current examples of such worthless projects.
Amongst the many impacts of this practice is countries having to experience debt traps, such as the one we are experiencing in Sri Lanka at present, due to inefficient allocation of borrowed funds, prioritisation of bribes, and other political considerations rather than the timeliness and magnitude of the benefits. Such projects either do not generate benefits or generate benefits at a slow rate. Thus, the tax revenue attributed to these projects is not sufficient to repay the loans.
Moreover, borrowing from more expensive commercial sources to avoid checks and balances of conventional donors like the World Bank and Asian Development Bank (ADB) exacerbates the debt crises. The current debt crisis which eventually led Sri Lanka to suspend its debt repayment is mainly due to borrowing from more expensive commercial sources and the corrupt practice of allocation of borrowed resources for slow-return or no-return projects.
Excessive costs of infrastructure
Grand corruption leads to higher costs for infrastructure development. It seems that the escalated cost of a project allows collusion between contracting companies and politicians and top bureaucrats so that contractors gain excess profits even after paying bribes. This is a win-win situation for contractors as well as politicians and top bureaucrats.
The Central Expressway segment between Rambukkana and Galagedara illustrates the gravity of corruption and its economic implications. Based on publicly available data on per-kilometre costs of highways of ADB-funded projects in 15 countries, the average cost of 33 projects was $ 1.63 million per km, with a range of $ 0.94-6.96 million. Some of the lower values in the ADB project sample are on account of two-lane roads.
The highest cost in this sample was recorded from the Southern Transport Development Project (STDP) and the writer’s comparison is based on the cost of this project. Based on the contract value of $ 1,870 million, the proposed highway segment will cost $ 93.5 million per km. The per-kilometre cost of the STDP is $ 6.96 million.
The Rambukkana-Galagedara road segment costs about 13.4 times the cost of the STDP. Even with the lower bid of $ 1,050 million, which was apparently rejected, the per-kilometre cost is $ 52.5. This difference cannot be explained by using higher resettlement costs or technical reasons such as elevated highways and tunnels. The only logical explanation is corruption.
Increased cost of borrowing
Corruption incentivises politicians and top bureaucrats to borrow from commercial sources despite the availability of low-interest loans from conventional donors like the World Bank, ADB, and bilateral donors.
Conventional donors make it a requirement to undertake financial and economic analysis of projects and impose strict procurement guidelines whereas commercial banks are only interested in the creditworthiness of the borrowing country. The same applies in the case of International Sovereign Bonds (ISBs).
Moreover, there is no coordination among bondholders to monitor the usage of the money by the borrowing government. This allows the borrowing country’s government to use the borrowed money for no-return/low-return projects which provide higher opportunities for corruption. Conventional lenders charge much lower interest rates and therefore the greater leaning towards commercial borrowing that has fostered corruption since 2007 is a case in point which has significantly contributed to the current debt crisis.
One of the commercial loans taken from Citibank had a repayment period of five years with an interest rate of 5.5%. At that time, the ADB provided loans with less than 2% interest rate, a grace period of 5-6 years, and a 20-year repayment period. The Government’s interest in borrowing from this costly source, despite a huge cost to society, can only be explained by the ability of the Government to use the borrowed money for certain purposes that allow the politicians and top bureaucrats involved to obtain higher commissions or some political advantage.
Poor-quality infrastructure
Higher costs of infrastructure can also be manifested in terms of poor-quality infrastructure. Politicians and top bureaucrats influence competitive bidding processes and contracts are awarded to less qualified companies to receive bribes. Poor-quality infrastructure with huge maintenance costs and frequent repairs is the end result.
Long delays of projects
The bidding process is sometimes delayed for years until politicians and top bureaucrats cut a lucrative deal from the contractor.
There are reasonable suspicions that the delay in awarding the contract for a proposed gas-fired power plant in Sri Lanka during the ‘Yahapalana’ regime was due to the two topmost politicians favouring two different companies and no one having enough power to override the other. The end result was the delay in constructing the power plant and having to purchase power at excessive cost.
Sri Lanka was the only country in South Asia that eliminated power cuts. The power cuts of 2022 were partly due to the delay in the implementation of the Ceylon Electricity Board (CEB) Generation Expansion Plan. Power cuts affect every sector in the economy and the ramifications of this in terms of Sri Lanka’s appeal for much-needed Foreign Direct Investments (FDIs), tourism, industry, and agriculture is enormous.
Good projects may never get implemented
Some development projects with positive development impacts are never implemented because of a failure to agree on the bribe. Often, this happens when politicians and top bureaucrats request a bribe that is too big given the size of the project.
Imagine a fish processing project that costs about $ 100 million and the requested bribe is $ 50 million for approving it. With this 50% cost escalation, the investing company cannot compete in the international market.
The private investor who has already spent a couple of millions of dollars for feasibility studies has no option other than giving up the project. The country loses the opportunity to implement a good investment project that would have generated considerable employment.
Discouraging foreign investment
Grand corruption discourages or even prevents FDIs. Simply stated, when imposed bribes are large, private companies cannot make a reasonable profit. Therefore, private investors avoid highly corrupt countries.
In this era of global integration together with advanced information technology, stories about corruption spread rapidly amongst potential investors. The corruption indices of international development agencies such as the World Bank confirm high levels of corruption in Sri Lanka.
It is worthwhile to undertake a detailed study as to why Sri Lanka failed to attract FDI despite a comprehensive incentive package provided by the Board of Investment (BOI). One of the obvious reasons for low FDI in Sri Lanka may be that larger bribes are unaffordable to investors. Even conventional donors hesitate to work in highly corrupt countries.
Once there was an attempt by the Japan International Cooperation Agency (JICA) to finance a segment of the Central Expressway. JICA wanted a clause in the loan agreement to the effect that if there were accusations of attempts at corruption in this project, it had the right to suspend or cancel the project. The Government did not agree to this clause, claiming that it violated the sovereign rights of the country. The sovereign right to drain public money!
Increase utility bills
The procurement process in Sri Lanka has many loopholes. One of the key powers vested with the Cabinet is to overrule the decisions of procurement committees. This allows political leaders to award contracts at an excessive cost to society.
For example, Sri Lanka entered into a 20-year Power Purchase Agreement (PPA) with India’s Adani Green Energy for two wind power stations developed by the company in the northeast. The project is supposed to install 484 MW of wind power in Mannar and Pooneryn. The Mannar (250 MW) and Pooneryn (234 MW) wind projects will be implemented with an investment of $ 740 million.
There were corruption allegations against this project and a number of court cases are also pending – three Fundamental Rights petitions have been filed in Sri Lanka’s Supreme Court challenging the wind power project proposed for Mannar.
The Public Utilities Commission of Sri Lanka (PUCSL) claims that the information submitted for approval by Adani Green Energy SL Ltd. (AGESL) did not adequately assess the least cost and technical compatibility.
As per Power and Energy Ministry information, the agreement was to pay $ 0.086 per kWh. The regulators’ recommended price was $ 0.005. As claimed by the CEB, some bids submitted by local firms offered $ 0.04 per kWh. Adani Green Energy sells wind power at $ 0.04 in India.
This 20-year contract will incur a loss of Rs. 183-234 billion per year. The total loss for 20 years at a discounted rate of 10% is about Rs. 1.6-2 trillion. These losses will be transferred to the public and eventually the electricity consumer will have to pay this additional amount over the next 20 years.
Life risks
When people cannot get access to healthcare, clean water, and safe places to live without paying bribes, their lives are at risk. Examples of corruption in approving buildings – eventually resulting in their collapse, killing many workers in neighbouring South Asian countries like Bangladesh – need to be taken into account. In Nepal, many buildings which had construction permits that certified them as earthquake-proof, collapsed during the earthquake in 2015.
Globally, 1.6% of annual deaths in children under the age of five years – more than 140,000 deaths – can be explained in part by corruption. Corruption-related risks to life in the health sector are emerging in Sri Lanka too.
The well-known immunoglobulin scandal is a case in point. Forged documents leading to the circulation of low-quality immunoglobulin vials, engendering a number of adverse allergic reactions and deaths among patients are clear signs of an emerging pattern of corruption-related life risks in Sri Lanka. Importing counterfeit drugs bypassing policies resulting in defective medical supplies is another common problem that causes life risks in the country.
Non-financial costs
Corruption has more than just financial and economic costs. It reduces public trust and citizens’ willingness to participate in society. For example, citizens who perceive politicians as corrupt may not bother to vote in elections, engage in politics, or pay taxes. The corruption revelations via telephone records released by a former Member of Parliament had a significant impact amongst the Sri Lankan public.
At this extremely difficult period when foreign remittances have been depleted, expatriate workers refuse to send money through official channels due to the lucrative black market and after floating the rupee due to the perception of corruption. Given the large number of new migrant workers, remittances should be in the range of $ 1-1.2 million per month; however, current remittances are still below $ 600 million per month.
Perpetuating inequality
As discovered in many countries, poor people suffer disproportionately from corruption. In lower-middle-income households, petty bribes to access a government service has detrimental effects on a family’s disposable income. When access to good quality education is limited to the non-poor, the poor will lose the only chance to improve their lives.
In countries where corruption is widespread, accessing health, education, and other basic services can have long-term negative impacts for economic growth.
Nurturing organised crime
Corruption is often linked to organised crime. It thrives in conflict and war. High levels of corruption can make prolonged conflict more likely and push post-conflict societies back into war. Widespread drug problems continue globally mainly because of the collusion of law enforcement agency officials and political leaderships with organised crime syndicates.
Promoting environmental degradation
Corruption can also undermine climate change and other environmental management initiatives, as powerful actors bribe their way out of environmental responsibilities in pursuit of profit. Moreover, corruption undermines the responsible management of natural resources. Depletion of forest resources despite heavy regulatory measures in Sri Lanka is a good example.
(Part II will be published next week)